Should I get a HELOC or a personal loan? What’s the difference?

WisePiggy Editors
  • Banking
  • 5 minute read

Should you opt for a personal loan or a HELOC? There are large differences between the two. And you’ll soon recognize which is better for you.

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Which one should I  choose: a personal loan or a HELOC?

How do you know whether to choose a personal loan or a HELOC? Well, that depends!  But on what?


The main factors to consider are your own personal circumstances such as whether you own your home, how good your credit is, and how much you can afford on payments.  Additionally, what you plan to spend the money on can help you decide because tax relief may be an option if you pay for home improvements with a HELOC.  Those tax breaks don’t apply if you use a personal loan, though.

So what is a HELOC and how is it different from a personal loan?

What is a HELOC?

HELOC is an acronym that stands for home equity line of credit. The amount by which the value of your home exceeds your mortgage balance is your home equity and with a HELOC, you use some of that equity to secure the amount you are borrowing.  Of course, that means that HELOCs are only available if you own your home.  If you don’t, a personal loan would be the way to go.

How do HELOCs work?

Ok, if you’re still reading you are likely a homeowner trying to choose between a personal loan and a HELOC.

Consider HELOCs the offspring of a classic home-equity loan and a credit card.

As with a home-equity loan:

  • You’ll typically be offered a lower interest rate
  • Your home is security (or collateral), so if you default, you could face foreclosure
  • Your borrowing period (“draw period”) can be quite long, often 10 years or more. With many HELOCs, after the initial borrowing term, there is an additional 5 or so years before the balance has to be paid off (“repayment period”). Always make sure to read and understand the terms of your loan beforehand.

As with a credit card:

  • You can borrow up to a set credit limit
  • You can repay and re-borrow up to that limit anytime you want
  • You only pay interest on your current balance
HELOC warning

One word of warning regarding HELOCs.  Some borrowers may find that after a decade or more of being able to borrow against their loan, and paying interest only on the balance, it can be quite a shock to suddenly be faced with paying down the entire loan plus interest.  If you plan to borrow a large sum against your equity and pay it back in equal installments, a classic home equity loan may be a better option for you.

So what are the differences between a personal loan and a HELOC?

Both types of loans typically come with variable interest rates, but you can occasionally find fixed-rate options. Here are a few more similarities and differences:

Interest rates

You may be surprised to learn that it’s possible to pay a lower interest rate on an unsecured personal loan than on a HELOC (which is secured against your property).  The reason for this is that when applying for a personal loan, lenders focus on your credit history versus the amount of equity you have (which is what they look at for a HELOC).  Keep in mind that credit scores can drastically impact personal loan rates.  Even mainstream lenders may have a range of 6-36% depending on whether you have good or and credit.  Some folks with especially low credit may not be approved at all.

In general, HELOCs may have a slightly lower average rate, but borrowing for a longer time may mean that overall, you actually may pay more in total.

Also, don’t forget about those tax breaks with HELOCs. If you are spending the proceeds on home improvement, then your total cost of borrowing can go down.  Always consult a professional tax advisor before making any decisions based on receiving a tax break.


As previously mentioned, HELOCs can last up to 15 to 20 years, including both the draw and the repayment periods.  Personal loans, on the other hand, may be much shorter, lasting up to five years in many cases.

Accessing your money

How you get your money is also different.  You will receive the entire lump sum if you take out a personal loan.  With a HELOC, however, you use it like a credit card and only draw down the funds as you need them and in the amount you need.

Setup costs and timeframe

Because HELOCs are secured to your property, they are considered a second mortgage.  Origination costs, escrow fees, and other administrative demands can rival those of a first mortgage.  Because of the additional paperwork required, HELOCs can take several weeks from the application stage to funds actually becoming available.

A personal loan, however, is much cheaper (and even occasionally free) and easy to set-up.  You can often get the money within a week, sometimes even the next business day.  Of course, the larger the loan, the more paperwork and longer timeframe you can expect.

So what did you decide works best for your needs: a personal loan or HELOC?